Although small and medium-sized enterprises (SMEs) comprise 99.6% of all businesses in the Philippines, employ 65% of its workforce and account for 35% of GDP, they face a host of growth challenges including lack of technical capacity, difficulty in accessing regional markets in ASEAN and, most notably, lack of access to finance. While the government moves to support credit growth and connections to national and regional supply chains will help, private sector offerings including new online payment platforms could offer perhaps the best mid-term solution to persistent challenges SMEs face in accessing new markets and services.
A September 2015 report by Deloitte and Visa, titled “Digital banking for small and medium-sized enterprises: Improving access to finance for the underserved”, found that total loan volumes for SMEs in the country stood at just $9bn in 2014, compared to Thailand’s region-leading $171bn. After adjusting for the size of its economy and contribution to GDP, the report’s authors found that the Philippines is lagging behind its regional neighbours in terms of credit access. Personal funds stand as the dominant source of financing for SMEs, with just 39% of respondents surveyed for the study reporting they had accessed finance through a bank loan; most banks require collateral before extending credit. Disbursement is often slow due to lack of available credit information, as well as lack of bank and government guidance on compliance documents. The cost of credit for SMEs is also much higher compared to large-scale corporate loans. This leads many SMEs to seek finance through alternative sources. Credit leasing accounted for 24% of SME financing, with supplier credit making up another 24%, followed by equity financing (10%) and grants (2%), according to the report. Non-financial impediments to SME development include rising business costs, difficulty in sourcing staff, intense competition as the ASEAN Economic Community integration process proceeds, unstable demand and burdensome regulations.
Promisingly for Philippine SMEs, the new administration of President Rodrigo Duterte has highlighted small business development as a critical economic priority. Before he was elected, Duterte promised to allocated P18bn ($380.8m) annually for SME lending during a speech to the Makati Business Club in April 2016. Duterte told attendees that each of the country’s 18 regions would receive P1bn ($21.1m) in annual funding in a bid to reduce reliance on exploitative loan sharks, with the programme to be overseen by the Department of Trade and Industry (DTI). He also promised to reduce the processing time for new business licences to three days. The increased focus on SMEs continued after Duterte’s May 2016 election victory. During his first state of the nation address, the president specifically directed government financial institutions to develop new financing option for SMEs, once again emphasising that the DTI will play an important role in any new lending initiatives.
The DTI, for its part, has been increasingly vocal about delivering new SME support mechanisms. In August 2016, for example, the department announced that it had mapped out plans to strengthen the SME sector and support small businesses as they join the global supply chain. Speaking to the media, Ramon Lopez, secretary of trade and industry, urged CEOs of large firms to support the entry of micro-, small and medium enterprises (MSMEs) in the ASEAN production network and supply chain under a new initiative, Kapatid, launched in partnership with the Philippine Centre for Entrepreneurship earlier in the month.
With participation from the Philippine Chamber of Commerce and Industry, the Association of the Filipino Franchisers and the Employers Confederation of the Philippines, the programme offers mentorship for micro-entrepreneurs, facilitates connections to shared service facilities, and links MSMEs into the value chains of larger companies, using a World Bank-recommended inclusive business model and promoting their growth.